Cathay Pacific is studying whether there has been a structural change in the business model for the cargo market as a result of high fuel prices and the ongoing economic slump in Europe.

Hong Kong's flag carrier is a major player in the cargo market, with eight Boeing 747-8 freighters, six 747-400 freighters, six 747-400ER freighters and six 747-400 converted freighters. It also has two more 747-8Fs and eight Boeing 777-200 freighters on order. The belly space in its passenger aircraft is also an important component of its cargo business.

But the slump in cargo business due to slow economic growth around the world, and especially in Europe, means that revenue from the segment will account for only around 20% of its overall numbers this year, down from the traditional 28%, Cathay's chief executive John Slosar said in a wide-ranging interview with Flightglobal publication Airline Business.

"Cathay was No 1 in the cargo business internationally in 2010 and 2011. It was a good thing to be in 2010 and not a good thing to be in 2011," he adds. "This is really challenging in a sustained nature in two different ways. "

North American markets are stronger and the newer 747-8Fs have been deployed there, where they are "working a treat" as a result of the improved fuel burn and cargo payload. Intra-Asian trade is also growing, and the airline is adding cargo connections within the region.

But there have been "real challenges" on connections between Asia and Europe, where the economic downturn has been sustained for the last two years, says Slosar. "You can't have a huge part of the business, Asia to Europe, down so much."

Cathay is also exposed to any volatility via its Shanghai-based joint venture with Air China that began operations in 2011, and has been performing badly as a result of the downturn.

"The way these things work out, if you had a choice, you probably would not have started this venture in 2011. But there we are, this is for the long term and we are not going to panic about the short term," he says.

Slosar is looking at whether it is sustainable to keep the old cargo business model, "which has been around forever" and is based on converting old passenger aircraft to freighters in order to have cheap assets at a low cost.

"High fuel costs really kill that model because those old planes are not fuel efficient. And even more of freight cost is fuel, and when fuel is high, that business model does not work as well," he adds.

The industry faces some "really difficult choices" on whether it should re-fleet and invest more - which shows that "you are pretty confident about the future" - or if it should bide the time and see what happens.

Cathay made that decision a few years ago by ordering 747-8Fs, but there is still a "big question before the house" on what it will do with the next batch of aircraft that it will receive and if it should keep buying aircraft.

"The answer, as with everyone else, is to wait and see what develops. There is some thought that some of the change we see in air cargo may be structural, maybe a permanent movement to sea freight and all that. At the same time, when we talk about high value goods that need to move fast, air is always a good solution to minimise your inventory holdings and maximise the supply holdings," says Slosar.

Source: Air Transport Intelligence news